The College Bubble

As the fallout from the housing bubble rains its radioactive ash into the financial markets, at least one group of Americans are still borrowing heavily. Students. As I parse the stream of panic about the economy, I wonder if a less dramatic but still troubling scenario could play itself out in the coming years in another booming debt market. If the job market dries up, what happens to the value of an education? Could we see the value of a college degree decline like the price tag on suburban McMansions?

Doubtful… but still, what happens when graduates, especially ones from from expensive private schools, enter the workforce with tens of thousands of dollars of debt? Even at subsidized rates, the interest on such a debt welcomes the new grad with a heavy monthly bill just to keep up with the interest. The average debt load for graduates has doubled in the past decade, according to the Project on Student Debt. Three fourths of college students work, and half of those who work put in more than 25 hours a week.

Obviously, students graduating with high debt loads are doing so with the assumption that they will be making a lot more than than they could otherwise. They’re counting on an optimistic future, just as the investors are who have bought up $350 billion in securitized student loan debt between ’98 and ’07 – according to Reuters last year.

Kamenetz portrays a generation desperate to keep up, to achieve, and to be financially independent: taking on ever more massive debt, hooked on cheap luxuries and trapped by ever-more expensive necessities.

Granted, no one is out there selling students the now famously toxic adjustable rate mortgages that were given out by the truckload to low-income home buyers. Student loans aren’t time-bombs with exploding interest rates at the end of just-long-enough fuses. But both students and home buyers were and are taking on debt based on a common assumption: that what they are investing in will continue to have value and indeed rise in value.

Irresponsible loaning, as has gone on in the housing market, is surely going on in the world of education. Institutions of higher learning are gatekeepers to the future, holding the keys of knowledge and reputation that people who want to pursue careers in almost any field need. They know students and their parents will pay a premium, and so they charge it assuming they can sell off the debt and keep their institutions afloat, and the burden is trucked down the highway into to the eternal American future. State Universities (such as the one I attend) are facing budget shortfalls, while tuition at private universities spirals ever upward.

Aside from any future toxicity in the debt market, a much more immediate effect of skyrocketing college tuition is the impact of what kind of career choices grads are forced to make right off the bat. In her book Generation Debt Anya Kamenetz observes that heavily indebted young people currently in their 20’s are often forced to immediately compete for corporate positions rather than lower-paying, entry-level jobs and internships that would help them gain experience in their field gradually, finding a niche where their particular skills and interests are suited. Kamenetz cites examples of young graduates who, with their student loans and credit card debt combined, racked up over $100,000 in debt while going to school. Kamenetz portrays a generation desperate to keep up, to achieve, and to be financially independent: taking on ever more massive debt, hooked on cheap luxuries and trapped by ever-more expensive necessities.

When Obama takes office, I hope his promise for an affordable college education available for all Americans is one he’ll make quick, concrete steps to realize. If educational costs rise beyond their true value, the college bubble might turn out to be another nightmare – not just for grads loaded up with debt, for many of whom it already is – but for the rest of the country.

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